Yardeni Stock Market Cycle

Deutsche Banc Alex.
Brown
Equity Research US Strategy December 10, 2001
Americas
Stock Market Cycles

Global Strategists Handbook
m o t t Bo ing Fish
Dr. Edward Yardeni Chief Investment Strategist (+1) 212 469 5715 edward.yardeni@db.com Amalia F. Quintana Equity Strategy Analyst (+1) 212 469 5713 mali.quintana@db.com
Deutsche Bank
- Introduction Buy Low. During bear markets, stock investors and investment strategists are constantly on the lookout for the bottom. This time is no different. Indeed, many of them thought they caught it at the beginning of April this year. They were wrong. Picking the exact bottom can be very rewarding, of course. Since 1960, there have been nine major troughs in the S&P 500, following declines of 15% or more and averaging minus 24%. After these cyclical lows in stock prices, the average 6- month gain was an impressive 23% (Exhibit 1). In this special issue of the Global Strategists Handbook , I present numerous charts relating key economic and financial indicators to the cycle in stock prices with the focus on finding the ones that are most useful in picking bottoms. My conclusion is that many of the ones that have worked best in the past are currently suggesting that the panic-selling low of September 21 was probably the bottom for this cycle. There are no guarantees: Past performance does not indicate future results, as we say in the investment business. The low might be retested. A lower low might still be in the cards. Moreover, even if it was the bottom, the rebound in stock prices over the next 12 months may be well below the average, in my judgment, because stocks are not as undervalued as they were at previous bottoms. Timing Tools. One of the best times to buy stocks is during crises, when panic selling occurs. The crises usually trigger corrective policy responses, which prove the doomsayers wrong. So they present great buying opportunities for bargain hunters (Exhibit 2). Of course, this is easier said than done. For example, during the first week that the stock market was open for trading after the terrorist attacks, the right time to buy was on Friday, not Monday. By the end of the following week, most of the bargains were gone. Exhibits 3-32 show many of the best market timing tools, including a few that are not as useful as widely believed: 1) Momentum: Major market bottoms usually occur when the S&P 500 is more than 5% below its 200-day moving average. Drops exceeding 10% of this average have always made bottoms, i.e., four times in the past. On September 21, the Dow was 21.2% below its 200-day moving average. On a year-over- year percent change basis, declines of 15% or more in the S&P 500 have always marked the bottoms. The market was down 8.9% in November from a year ago. 2) Valuation: Historically, over the period examined in this report, major stock market bottoms often coincided with cyclical troughs in the price-to-earnings (p/e) ratio. This time, the p/e based on four-quarter trailing earnings was at an all-time high of 33.5 during the second quarter. Based on 52-week forward consensus expected earnings for the S&P 500, the p/e is currently 20, down from the record 25 in early 1999, but still relatively high. I dont believe this rules out a September bottom, but I do think it limits the upside return over the next 12 months compared to the historical average. This is because some
Deutsche Banc Alex. Brown Global Strategists Handbook / December 10, 2001 / Page 1
of the historical 12- month average return was attributable to the rebound in the p/e from its cyclical lows (Exhibit 5). Another useful valuation tool, the Feds Stock Valuation Model, shows that stocks were undervalued during each of the previous four market bottoms. They appear to have been undervalued again in September, according to the model (Exhibit 6). 3) Interest Rates. Stock market bottoms usually occur after the Fed has started to ease monetary policy. They have occurred between zero and 40 months after the peak in the federal funds rate, with an average of 12 months during the previous seven easing cycles. This time, the Fed cut the federal funds rate ten times over the first ten months of 2001 and only now are there mounting signs of a significant bottom for stock prices (Exhibit 7). The 10- year Treasury bond yield has a better record as a timing tool having peaked almost exactly at the same time as stocks troughed on six occasions. However, these are now deflationary times, and the trough in stock prices is more likely to coincide with the upturn in bond yields as happened in 1998 (Exhibit 8). Other useful interest rate tools are yield curve spreads and credit-quality corporate bond yield spreads. The federal funds rate dropped below the 10-year Treasury yield at the start of the year, usually a necessary condition for a stock market bottom (Exhibit 9). The spread between A-rated corporate bond yields and the 10-year Treasury usually spikes up to a cyclical peak just as stock prices start to rebound (Exhibit 10). 4) Earnings. In the past, stock prices started to recover three to 15 months before the bottom in reported earnings, on a four-quarter trailing basis. There is less of a lead time relative to 52-week forward consensus expected earnings, which started to bottom during the summer. But now, after the terrorist attacks, the bottom for earnings is likely to occur at the beginning of next year (Exhibit 11). This outlook is confirmed by my Weekly Profits Proxyi.e., Business Weeks industrial production index multiplied by the CRB raw industrials spot price index. It has been falling steeply since the attacks (Exhibit 12). 5) Economic Indicators. Stock prices tend to trough before production indicators do so. The lead time has been three to nine months for industrial production (Exhibit 13). A tighter relationship is with the National Association of Purchasing Managements (NAPM) Production Index. It is a diffusion index and has almost always bottomed at the same time or very shortly after stock prices did so (Exhibit 14). An even better coincident indicator of stock market bottoms is a composite NAPM index of nominal activity that I construct by adding the associations production and pricing indexes and dividing by two. It should bottom before the end of the year, in my opinion (Exhibits 15 and 16). I also like to track the yearly percent change in industrial commodity prices (Exhibit 17). Sustained stock market rebounds and rallies rarely happen when these prices are falling (Exhibit 18). Stock market bottoms often coincide with peaks in initial unemployment claims and our Boom-Bust Barometer (Exhibits 19 and 20). The expectations component of the Consumer Sentiment Index has a better track record of calling stock market bottoms than does the present component (Exhibits 21, 22, 23, 24, 25, and 26). Finally, there doesnt seem to be any useful predictive relationship between key employment indicators and the stock market (Exhibits 27 and 28). There is
Page 2 / December 10, 2001 / Deutsche Banc Alex. Brown Global Strategists Handbook
also very little correlation between the turning points in the monetary and stock market cycles (Exhibits 31 and 32). Sector Bets. Most institutional investors cant raise a great deal of cash while waiting for the next crisis to create buying opportunities. Most tend to be always fully invested, so market timing may not be a very relevant exercise for them. Nevertheless, market timing can help boost performance by identifying sectors and industries that tend to either under perform or outperform during a cyclical recovery in stock prices. Exhibits 33-60 are designed to provide some insights for the selected industries where relative performance data are available for several years. 1) Basic Industries. Paper & Forest Products and Chemicals were underperformers during the late 1990s and are now starting to show some relative strength again. There have been a few instances where they outperformed before the trough in stock prices. They rarely do so after major stock market bottoms (Exhibits 33 and 34). Aluminum and Iron & Steel have been underachievers since the 1960s. In a few instances, Aluminum has outperformed before the trough in the S&P 500, but this rarely continues past the trough (Exhibits 35 and 36). Metals Mining shows the same historical pattern of often performing relatively well before, but not after, S&P 500 troughs (Exhibit 37). Containers & Packaging has occasionally outperformed for a brief period after major cyclical lows in stock prices (Exhibit 38). 2) Capital Goods stock prices tend to trough relative to the S&P 500 near market bottoms (Exhibit 39). Computers tend to outperform around stock market troughs. Currently, they are underperforming (Exhibit 40). 3) Consumers. In the past, Retail Department Stores often either were market performers or above-average performers following stock market troughs (Exhibit 41). The same can be said for Consumer Finance, though the record is more mixed for this industry (Exhibit 41). Autos have tended to outperform the market around S&P 500 troughs, though they are currently underperforming. Auto Parts lag Autos on the way down, but often lead on the way up (Exhibit 42). Entertainment was a very volatile outperformer during the 1970s and 1980s. It has been a volatile market performer since the early 1990s (Exhibit 43). Homebuilding stocks sometimes bottom when the market does (Exhibit 44). Beverages, Foods, and Personal Care tend to outperform going into market troughs and underperform coming out, though there have been exceptions to the rule (Exhibits 45-48). 4) Energy. International Integrated Oils tend to be very volatile market performers. The volatility is driven by oil prices. Relative to the S&P 500, Domestic Integrated Oils have been driven entirely by the trend in oil prices (Exhibits 49 and 50). There also isnt much of a relationship between the stock markets cycle and Oil & Gas Drilling & Equipment and Natural Gas Utilities (Exhibits 51 and 52). 5) Financials. Banks often underperform after stock market bottoms. They are outperforming currently because the yield curve is quite bullish for this industry (Exhibit
53). Property Casualty Insurance and Savings & Loan Companies tend to underperform after the trough in the S&P 500 (Exhibits 53 and 54). 6) Health Care , including Drugs and Medical Products & Supplies, often underperforms after S&P 500 troughs (Exhibits 55 and 56). 7) Transportation. Truckers and Railroads often outperform the market for several months after S&P 500 troughs (Exhibits 57 and 58). 8) Miscellaneous. Electric Utilities have been long-term underperformers. They tend to outperform for short periods prior to S&P 500 troughs (Exhibit 59). Gold & Precious Metals Mining has often spiked relative to the S&P 500 near stock market troughs (Exhibit 60).
- S&P 500 #1
2040 1640 1240 840 T T T T T T T T T ? 12/7 2040 1640 1240 840
440
S&P 500 INDEX* (ratio scale)

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440
40 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
40
The T-lines shown in all of the following charts designate the major cyclical troughs in the S&P 500 following declines of 15% or more from the previous cyclical peaks. There have been 10 such bear markets since 1960, with an average decline of 24% (including the current 37% drop). The average 6-month gain after the past nine troughs has been 23%.
T = S&P 500 major cyclical trough * Monthly through April 1994, weekly thereafter.
#2
1850 1550 1250 950 650 1973 Oil Embargo 1982 Drysdale Securities & Mexico Default 1984 Continental Illinois 1990 S&L Crisis
S&P 500 INDEX & CRISES (ratio scale)

1994 Mexican Peso Crisis Nov
1850 1550 1250 950 650 2001 WTC Attack 350
350
1970 Penn Central
1974 Franklin National
1980 Silver Bubble 1962 Cuban Missile Crisis
1998 LTCM/Russian Default Crisis 1990 Persian Gulf Crisis 1997 Pacific Rim Crisis
1987 Stock Market Crash yardeni.com
More often than not, major bottoms coincide with financial crises, which trigger panic selling. The crises, in turn, usually trigger corrective policy responses, which prove the doomsayers wrong. So they present great buying opportunities for bargain hunters.
50
50
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
- Momentum #3
20 T 15 T T T T T T T T ? 15 20
Major market bottoms usually occur when the S&P 500 is more than 5% below its 200-day moving average. Drops exceeding 10% of this average have always made bottoms, i.e., four times in the past.
10
10
5 yardeni.com
0 12/7
-5
-5
-10
-10
-15
-15
-20
S&P 500 INDEX (percent above/below 200-day moving average)

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
-20
-25
-25
T = S&P 500 major cyclical trough Monthly through 2000, weekly thereafter.
#4
75 T T T T T T T T T ? 75
On a year-over-year basis, declines of 15% or more in S&P 500 Index have always marked the bottoms.
50
S&P 500 INDEX (yearly percent change)
50
25
25
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Nov -25 -25
-50 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
-50
T = S&P 500 major cyclical trough
- Valuation #5
40 T 35 Q2 30 30 T T T T T T T T ? 35 40
25
TRAILING P/E RATIO FOR S&P 500*
25 yardeni.com 12/7
20
20
Major stock market bottoms often coincide with cyclical troughs in the P/E ratio, i.e when stocks are relatively cheap.
15
15
10
10
FORWARD P/E RATIO FOR S&P 500**

5 5
0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
T = S&P 500 major cyclical trough * Using four-quarter trailing reported earnings. ** Using 52-week forward consensus expected operating earnings per share (mid-month data). Monthly through April 1994, weekly thereafter.
#6
70 T 60 50 40 30 20 10 0 -10 -20 -30 -40 yardeni.com 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 T T T ? 60 70
FEDS STOCK VALUATION MODEL* (percent)
50 40 30
Overvalued
12/7
20 10 0 -10
The Feds Stock Valuation Model shows that stocks were undervalued during each of the bottoms since 1979.
Undervalued
-20 -30 -40
T = S&P 500 major cyclical trough * Ratio of S&P 500 Index to its Fair-Value (52-week forward consensus expected S&P 500 operating earnings per share divided by the 10-year US Treasury bond yield) minus 100. Monthly through April 1994, weekly thereafter. Source: Thomson Financial
- Interest Rates #7
22 T 20 18 16 14 12 10 8 6 4 2 0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 12/7 T T T T T T T T ? 20 18 16 22
Stock market bottoms usually occur after the Fed has started to ease monetary policy. Most recently, the Fed started easing in early January 2001 and it has taken longer to make a stock market bottom.
FEDERAL FUNDS RATE*

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14 12 10 8 6 4 2 0
T = S&P 500 major cyclical trough * Monthly through 1986, 4-week average thereafter.
#8
18 T 16 T T T T T T T T ? 16 18
Stock market bottoms often coincide with cyclical peaks in the bond yield during inflationary times. During the more recent deflationary times, the trough in stock prices is more likely to coincide with the upturn in the bond yield as in 1998.
14
14
12
10-YEAR TREASURY BOND YIELD*

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12
10
10
6 12/7 4
2 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
T = S&P 500 major cyclical trough * Monthly through 1986, 4-week average thereafter.
- Interest Rates #9
5 T 4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 yardeni.com 12/7 T T T T T T T T ? 4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 5
YIELD CURVE*
The yield curve spread tends to cross from negative to positive territory at major stock market bottoms. The yield curve did so again most recently at the start of 2001.
T = S&P 500 major cyclical trough * 10-year Treasury yield less federal funds rate. Monthly through 1987, weekly thereafter.
#10
400 T 350 T T T T T T T T ? 350 400
300
MOODYS A-RATED CORPORATE BOND YIELD* LESS 10-YEAR TREASURY BOND YIELD
300 12/7 250 yardeni.com
250
200
200
Stock prices tend to trough when credit-quality corporate bond yield spreads peak, as is likely to be the case again soon.
150
150
100
100
50
50
0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
T = S&P 500 major cyclical trough. Monthly through 1986, weekly thereafter. * Based on nearly 100 seasonal bonds with remaining maturities of at least 20 years. Source: Moodys Investors Service.
- Earnings #11
82 72 62 52 T T T T T T T T T ? 12/7 Q2 32 22 yardeni.com 82 72 62 52 42
In the past, stock prices started to recover 3 to 15 months before the bottom in reported earnings. There is less of a lead time relative to expected earnings.
42
S&P 500 EARNINGS (ratio scale)
32 22
12 Operating* Reported**
12
2 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
T = S&P 500 major cyclical trough * 52-week forward consensus expected S&P 500 operating earnings per share. Monthly through April 1994, weekly thereafter. ** Four-quarter sum. Source: Thomson Financial
#12
500 T T T T T T T T T ? 500
Stock prices often trough shortly before upturns in our Weekly Profits Proxy.
400
400
WEEKLY PROFITS PROXY*

11/24 300 300
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200
200
100
100
0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
T = S&P 500 major cyclical trough * Business Weeks industrial production index multiplied by CRB raw industrials spot price index divided by 1000.
- Production #13
185 165 145 125 105 85 yardeni.com T T T T T T T T T ? 11/24 Oct 185 165 145 125
BUSINESS WEEK PRODUCTION INDEX (ratio scale, four week moving average)
105 85
65
65
45
45
INDUSTRIAL PRODUCTION: MANUFACTURING (ratio scale, 1992=100)
The S&P 500 is included in the Index of Leading Economic Indicators. Industrial production is a component of the Index of Coincident Indicators. The bottom in stock prices led the bottom in industrial production 5 times since 1960 with a lead time of 3 to 9 months.
25 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
25
#14
90 T 80 T T T T T T T T ? 80 90
NAPM PRODUCTION INDEX
70
70
60
60
Stock prices bottomed just before or at the same time as the NAPM Production Index did so 7 times since 1960.
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50 Nov 40
50
40
30
30
20 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
20
- NAPM Composite #15

80 T 75 T T T T T T T T ? 75 80
NAPM COMPOSITE INDEX
The NAPM Composite Index has bottomed either at the same time or a few months after stock prices bottom 6 out of 9 times since 1960.
70 65 60 55 50 45 40 35 30 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
70 65 60 55 50 45 40 35 30
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T = S&P 500 major cyclical trough Source: National Association of Purchasing Management.
#16
90 T T T T T T T T T ? 90
80
(NAPM PRODUCTION PLUS NAPM PRICE)/2
80
Since 1960, 9 out of 10 times, stock prices rebounded from their cyclical lows within a month or two of the bottom in this "nominal" NAPM composite index.
70 yardeni.com
70
60
60
50
50
40
Nov
40
30 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
30
T = S&P 500 major cyclical trough Source: National Association of Purchasing Management.
- Commodity Prices #17

525 450 375 T T T T T T T T T ? 525 450 375
CRB RAW INDUSTRIALS SPOT PRICE INDEX (1967=100, ratio scale)
300
300
225
12/4 12/11
225
Stock market bottoms usually occur after commodity prices have peaked.
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150
CRB FUTURES PRICE INDEX (1967=100, ratio scale)*
150
75 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
75
#18
80 T 70 60 50 40 30 20 10 0 -10 -20 -30 -40 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 12/4 yardeni.com T T T T T T T T ? 70 80
CRB RAW INDUSTRIALS SPOT PRICE INDEX (yearly percent change)
60 50 40 30 20 10 0 -10 -20 -30 -40
Stock prices usually recover when industrial commodity prices are rising on a year-over-year basis. Currently they are falling.
- Boom-Bust Barometer #19

725 T 675 625 575 525 yardeni.com 475 425 375 325 275 225 T T T T T T T T ? 675 725
INITIAL UNEMPLOYMENT CLAIMS (four-week m.a., thousands, s.a)
625 575 525 475 425 375 325 275 225 175
12/1
Stock market bottoms often coincide with peaks in initial unemployment claims and troughs in our Boom/Bust Barometer.
175 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
#20
120 T 110 100 T T T T T T T T ? 110 100 120
BOOM BUST BAROMETER*

90 80 70 60 50 40 30 20 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 90 80 70 60 50 40 30 20
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T = S&P 500 major cyclical trough * CRB raw industrials spot price index divided by initial unemployment claims.
- Consumer Sentiment #21

130 T 120 T T T T T T T T ? 120 130
CONSUMER SENTIMENT INDEX: PRESENT*
110
110
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100 Dec 90
100
90
80
80
70
70
60 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
60
T = S&P 500 major cyclical trough * Quarterly through 1978, monthly therafter. Source: Survey Research Center, University of Michigan.
#22
120 T 110 T T T T T T T T ? 110 120
The "expectations" component of the Consumer Sentiment Index has a better track record of calling stock market bottoms than does the "present" component.
CONSUMER SENTIMENT INDEX: EXPECTATIONS*
100
100
90 yardeni.com
90
80
Dec
80
70
70
60
60
50
50
40 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
40
T = S&P 500 major cyclical trough * Quarterly through 1978, monthly therafter. Source: Survey Research Center, University of Michigan.

200 T 180 160 140 120 100 80 60 40 20 T T T T T T T T ? 180 200
NEWS HEARD OF RECENT CHANGES IN BUSINESS CONDITIONS*
160 140 120 100 80 60 40 20 0
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Stock market bottoms usually occur when the news background is the worst, and when consumers are most negative about the year ahead outlook for business.
0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
T = S&P 500 major cyclical trough. Quarterly through 1977, 3-month moving average thereafter. * Favorable minus unfavorable plus 100. Source: Survey Research Center, University of Michigan.
#24
250 T 225 200 175 150 125 100 75 50 25 0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 Dec Dec T T T T T T T T ? 225 250
CURRENT BUSINESS CONDITIONS VERSUS A YEAR AGO* (solid line) EXPECTED CHANGE IN BUSINESS CONDITIONS IN A YEAR* (dash line)
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200 175 150 125 100 75 50 25 0
T = S&P 500 major cyclical trough. Quarterly through 1977, 3-month moving average thereafter. * Better minus worse plus 100 Source: Survey Research Center, University of Michigan.

200 T T T T T T T T T ? 200
BUSINESS CONDITIONS EXPECTED DURING THE NEXT 12 MONTHS*

150 150
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100 Dec
100
50
50
0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
T = S&P 500 major cyclical trough. Quarterly through 1977, 3-month moving average thereafter. * Good minus bad plus 100 Source: Survey Research Center, University of Michigan.
#26
160 T 150 140 130 120 110 100 90 80 70 60 50 40 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 Dec yardeni.com T T T T T T T T ? 150 160
Often, consumers assessment of the future is most pessimistic near market bottoms.
BUSINESS CONDITIONS EXPECTED FOR THE NEXT 5 YEARS*
140 130 120 110 100 90 80 70 60 50 40
T = S&P 500 major cyclical trough. Quarterly through 19977, 3-month moving average thereafter. * Good minus bad plus 100 Source: Survey Research Center, University of Michigan.
- Employment #27
8 T 7 6 5 4 3 2 1 0 Nov -1 -2 -1 -2 -3 -4 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 yardeni.com T T T T T T T T ? 7 6 8
PAYROLL EMPLOYMENT (yearly percent change)
5 4 3 2 1 0
Stock market bottoms have coincided as often with the peak as with the trough in employment growth. The same mix applies to the jobless rate.
-3 -4
#28
11.5 11.0 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 Nov yardeni.com T T T T T T T T T ? 11.5 11.0 10.5 10.0
CIVILIAN UNEMPLOYMENT RATE (percent)
9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0
- Resource Utilization #29

98 T T T T T T T T T ? 90
96 85
Nov 94 yardeni.com
80
92
EMPLOYMENT RATE* (solid line, left scale)

Oct 90 75
CAPACITY UTILIZATION: TOTAL (dash line, right scale)
88 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
70
T = S&P 500 major cyclical trough * 100 minus unemployment rate.
#30
95 T T T T T T T T T ? 95
The Resource Utilization Rate tends to bottom a few months after the stock market does so.
RESOURCE UTILIZATION RATE* (percent)

90 yardeni.com 90
85
Oct
85
80 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
80
T = S&P 500 major cyclical trough * Average of all industries capacity utilization rate plus employment rate, i.e, percentage of labor force that is employed.
- Money #31
20 T T T T T T T T T ? 20
15
15
MONETARY BASE* (yearly percent change)

10 11/28 10
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-5 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
-5
Hard to see a useful correlation between monetary and stock price cycles.
20
#32
20 T T T T T T T T T ?
15 11/26
15
10
10
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M3* (yearly percent change)
-5 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
-5
- Basic Materials #33

3.5 T T T T T T T T T ? 3.5
3.0
3.0
2.5 yardeni.com
2.5
2.0
2.0
1.5
1.5
PAPER & FOREST PRODUCTS RELATIVE TO S&P 500*

1.0
12/7 1.0
.5 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
.5
#34
1.2 T T T T T T T T T ? 1.2
1.0
1.0
These two basic materials industries were underperformers during the late 1990s and are now starting to show some relative strength again. There have been a few instances where they outperformed before the trough in stock prices.
.8
CHEMICALS RELATIVE TO S&P 500*

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.8
.6
.6
.4 12/7
.4
.2 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
.2

2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 .8 .6 .4 12/7 T T T T T T T T T ? 2.6 2.4 2.2 2.0 1.8
ALUMINUM RELATIVE TO S&P 500*

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1.6 1.4 1.2 1.0 .8 .6 .4 .2 .0
These two basic materials industries have been underachievers since 1960s. In a few instances, Aluminum has outperformed before the trough in the S&P 500.
.2 .0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
T = S&P 500 major cylical trough * Monthly through April 1994, weekly thereafter.
#36
1.6 T 1.4 T T T T T T T T ? 1.4 1.6
1.2
1.2
1.0
IRON & STEEL RELATIVE TO S&P 500*

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1.0
.8
.8
.6
.6
.4
.4
.2 12/7 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
.2
.0
.0

1.0 T T T T T T T T T ? 1.0
.8
.8
.6
.6
Metals Mining industry is overdue for some relative gains.
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.4
.4
.2
METALS MINING RELATIVE TO S&P 500*

12/7
.2
.0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
.0
#38
4 T T T T T T T T T ? 4
CONTAINERS & PACKAGING RELATIVE TO S&P 500*

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Containers and Packaging rebounding nicely after years of underperformance.
2 12/7
0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
- Capital Goods & Computers #39

1.2 T T T T T T T T T ? 1.2
1.1
1.1
Capital Goods tends to trough relative to S&P 500 near market troughs.
1.0 yardeni.com
1.0
.9
.9
.8
CAPITAL GOODS RELATIVE TO S&P 500*
12/7 .8
.7
.7
.6 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
.6
#40
1.8 T 1.6 T T T T T T T T ? 1.6 1.8
Computers tend to outperform around stock market troughs. Currently, they are underperforming.
1.4
COMPUTER (HARDWARE) RELATIVE TO S&P 500*
1.4
1.2 yardeni.com
1.2
1.0
1.0
.8
.8
.6 12/7 .4
.6
.4
.2
.2
.0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
.0
- Consumer Cyclicals #41

4.0 T 3.5 T T T T T T T T ? 3.5 4.0
3.0
3.0
RETAIL DEPARTMENT STORES RELATIVE TO S&P 500*

2.5 yardeni.com 2.5
2.0
2.0
Department Stores and Consumer Finance sometimes outperform S&P 500 during stock market rebounds from major troughs.
1.5 12/7 1.0
1.5
1.0
.5
CONSUMER FINANCE RELATIVE TO S&P 500*

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
.5
.0
.0
#42
1.6 T 1.4 T T T T T T T T ? .25
1.2
AUTO PARTS RELATIVE TO S&P 500 INDEX (right scale)*
.20
1.0 yardeni.com
.15
.8
.6
.10
Autos often outperform the market just before and just after market troughs. This is not happening now. Auto Parts lag Autos on the way down, but often lead on the way up.
.4 12/7 .2 .05
AUTOS RELATIVE TO S&P 500 INDEX (left scale)*

.00 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
.0
- Consumer Cyclicals #43

5.5 T 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 .5 .0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 T T T T T T T T ? 5.0 4.5 4.0 5.5
Entertainment was a very volatile outperformer during the 1970s and 1980s. It has been a volatile market performer since early 1990s.
ENTERTAINMENT RELATIVE TO S&P 500*
12/7 3.5 yardeni.com 3.0 2.5 2.0 1.5 1.0 .5 .0
#44
.5 T T T T T T T T T ? .5
Not much correlation between Homebuilding stocks cycle and S&P 500 cycle.
.4
.4
.3
HOMEBUILDING RELATIVE TO S&P 500*

yardeni.com
.3
.2 12/7
.2
.1
.1
.0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
.0
- Consumer Staples #45

1.8 T 1.6 T T T T T T T T ? 1.6 1.8
1.4
1.4
1.2
BEVERAGES (ALCOHOLIC) RELATIVE TO S&P 500*

yardeni.com
1.2
1.0 12/7
1.0
.8
.8
.6
.6
.4
.4
.2
.2
.0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
.0
#46
5 T T T T T T T T T ? 5
Beverages tend to outperform going into market troughs and underperform coming out.
BEVERAGES (NON-ALCOHOLIC) RELATIVE TO S&P 500*

yardeni.com 12/7
0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
- Consumer Staples #47

2.4 T 2.2 T T T T T T T T ? 2.2 2.0 1.8 2.4
Foods quickly regaining much of their relative strength that was lost in the late 1990s.
2.0 1.8 1.6 1.4 1.2 1.0 .8 .6 .4 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
FOODS RELATIVE TO S&P 500*

yardeni.com 12/7
1.6 1.4 1.2 1.0 .8 .6 .4
#48
1.4 T T T T T T T T T ? 1.4
1.2
1.2
Personal Care tends to outperform going into stock market troughs and underperform coming out.
1.0
PERSONAL CARE RELATIVE TO S&P 500*

yardeni.com
1.0
.8
.8
.6
12/7
.6
.4
.4
.2 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
.2
- Energy #49
1.1 T T T T T T T T T ? 1.1
1.0
1.0
.9 yardeni.com
.9
.8 12/7
.8
International Integrated Oil stocks tend to be volatile market performers. The volatility is driven by oil prices.
.7
.7
.6
OIL (INTERNATIONAL INTEGRATED) RELATIVE TO S&P 500*
.6
.5 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
.5
#50
4 T T T T T T T T T ? 4
OIL (DOMESTIC INTEGRATED) RELATIVE TO S&P 500*

yardeni.com
Domestic Integrated Oils relative performance is driven entirely by trend in oil prices.
1 12/7
0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
- Energy #51
25 T T T T T T T T T ? 25
20
20
OIL & GAS (DRILLING & EQUIPMENT) RELATIVE TO S&P 500*

15 15 yardeni.com
10
10
5 12/7 0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
Not much of a relationship between these two industries and the stock markets cycle.
#52
1.6 T T T T T T T T T ? 1.6
1.4
1.4
1.2 yardeni.com
1.2
1.0
1.0
NATURAL GAS RELATIVE TO S&P 500*

.8
.8
.6
12/7
.6
.4 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
.4
- Financials #53
1.4 1.3 1.2 1.1 1.0 .9 .8 .7 .6 .5 .4 .3 .2 .1 .0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 12/7 T T T T T T T T T ? 1.4 1.3 1.2 1.1 1.0
MONEY CENTER BANKS RELATIVE TO S&P 500 (solid line)* MAJOR REGIONAL BANKS RELATIVE TO S&P 500* (dash line) SAVINGS & LOAN COMPANIES RELATIVE TO S&P 500* (dotted line)
.9 yardeni.com .8 .7 .6 .5 .4 .3 .2 .1 .0
Banks and thrifts tend to outperform before the stock market bottoms though a predictable pattern is hard to find.
#54
1.5 T 1.4 1.3 1.2 1.1 1.0 .9 12/7 .8 .7 .6 .5 .4 .3 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 yardeni.com T T T T T T T T ? 1.4 1.3 1.2 1.1 1.0 .9 .8 .7 .6 .5 .4 .3 1.5
PC Insurance companies tend to be market performers.
INSURANCE (PROPERTY CASUALTY) RELATIVE TO S&P 500*
- Health Care #55

6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 .5 .0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 12/7 T T T T T T T T T ? 6.5 6.0 5.5 5.0 4.5
DRUGSMAJOR PHARMACEUTICALS RELATIVE TO S&P 500*
4.0 yardeni.com 3.5 3.0 2.5 2.0 1.5 1.0 .5 .0
Health Care often underperforms after S&P 500 troughs.

.9
#56
.9 T .8 T T T T T T T T ? .8
.7
HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES) RELATIVE TO S&P 500*
12/7
.7
.6 yardeni.com
.6
.5
.5
.4
.4
.3
.3
.2
.2
.1
.1
.0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
.0
- Transportation #57
1.6 T 1.4 T T T T T T T T ? 1.4 1.6
1.2
TRUCKERS RELATIVE TO S&P 500*
1.2
1.0 yardeni.com
1.0
.8
.8
.6
.6
.4
.4
.2
12/7
.2
.0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
.0
#58
1.0 T T T T T T T T T ? 1.0
Truckers and Railroads often outperform the market for several months after S&P 500 troughs.
.8
.8
RAILROADS RELATIVE TO S&P 500*

yardeni.com .6 .6
12/7
.4
.4
.2 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
.2
- Miscellaneous #59
1.0 T T T T T T T T T ? 1.0
Electric Utilities have been long-term underperformers. They tend to outperform for short periods prior to S&P 500 troughs.
.8
.8
.6
ELECTRIC COMPANIES RELATIVE TO S&P 500*

yardeni.com
.6
.4
.4
.2
.2
12/7 .0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 .0
#60
2.0 T T T T T T T T T ? 2.0
On a relative basis, Gold has often spiked up near S&P 500 troughs.
1.5
GOLD & PRECIOUS METALS MINING RELATIVE TO S&P 500*

yardeni.com
1.5
1.0
1.0
.5
.5
12/7 .0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 .0
Deutsche Bank Equity Sales Offices, Americas

Deutsche Banc Alex. Brown Inc. 950 East Paces Ferry Road Suite 3320 Atlanta, GA 30326 (404) 812 6800 Deutsche Banc Alex. Brown Inc. nd 31 West 52 Street New York, NY 10019 (212) 469 5000 Deutsche Banc Alex. Brown Inc. 1 South Street Baltimore, MD 21202 (410) 727 1700 Deutsche Banc Alex. Brown Inc. 225 Franklin Street th 25 Floor Boston, MA 02110 (617) 988 8600 Deutsche Banc Alex. Brown Inc. 3033 East First Avenue Suite 303 Third Floor Denver, CO 80206 Tel: (303) 394 6800 Deutsche Bank SA - Mexico Edificio Torre Esmeralda Blvd. Manuel Avila Camacho No. 40, Piso 17, Col. Lomas deChapultepec, 11000 Mexico, DF Tel: (525) 201 8000 Deutsche Banc Alex. Brown Inc. 130 Liberty Street New York, NY 10006 (212) 250 2500
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Deutsche Bank Equity Sales Offices, International

Deutsche Bank AG Taunusanlage 12 rd 3 Floor Frankfurt, Germany 60325 (49) 69 9103 7597 Deutsche Securities Australia Limited Level 19, Grosvenor Place 225 George Street Sydney, NSW 2000 Australia (61) 2 9258 1234 Deutsche Bank AG Geneva st 7, Rue Du Rhone, 1 Floor Geneva, Switzerland, 1204 (41) 22 319 4000 Deutsche Bank AG London 1 Great Winchester Street London EC2N 2EQ United Kingdom (44) 207 545 4900 Deutsche Bank AG Zurich Bahnhofquai 9-11 CH-8023 Zurich, Switzerland (411) 224 7979 Deutsche Bank AG Paris 3, Avenue de Friedland 75008 Paris, France (33) 1 5375 2446
Deutsche Securities Limited, Tokyo th 2-11-1 Nagatacho, 20 Floor Sanno Park Tower Chiyodu-ku, Tokyo 100-6171 (813) 5401 6990
The information and opinions in this report were prepared by Deutsche Bank or one of its affiliates (collectively Deutsche Bank). This report is based upon information available to the public. The information herein is believed by Deutsche Bank to be reliable and has been obtained from sources believed to be reliable, but Deutsche Bank makes no representation as to the accuracy of completeness of such information. Deutsche Bank and/or its affiliates worldwide may be market makers or specialists in, act as advisers or lenders to, have positions in and effect transactions in securities of companies mentioned herein and also may provide, may have provided, or may seek to provide investment banking services for those companies. In addition, Deutsche Bank and/or its affiliates or their respective officers, directors and employees hold or may hold long or short positions in the securities, options thereon or other related financial products of companies discussed herein. Opinions, estimates and projections in this report constitute Deutsche Banks judgment and are subject to change without notice. Prices and availability of financial instruments also are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction in which such an offer or solicitation would violate applicable laws or regulations. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and investment objectives. If a financial instrument is denominated in a currency other than an investors currency, a change in exchange rates may adversely affect the price or value of, or the income derived from, the financial instrument, and such investor effectively assumes currency risk. In addition, income from an investment may fluctuate and the price or value of financial instruments described in this report, either directly or indirectly, may rise or fall. Furthermore, past performance is not necessarily indicative of future results. Unless governing law permits otherwise, all transactions should be executed through the Deutsche Bank entity in the investors home jurisdiction. In the U.S. this report is approved and/or distributed by Deutsche Banc Alex. Brown Inc., a member of the NYSE, the NASD and SIPC. In the United Kingdom this report is approved and/or distributed by Deutsche Bank AG, which is regulated by The Securities and Futures Authority (the SFA), is not for distribution to private customers (as that term is defined under the rules of the SFA) and no financial instruments referred to herein will be made available to any such private customer. In jurisdictions other than the U.S. and the U.K. this report is distributed by the Deutsche Bank affiliate in the investors jurisdiction, and interested parties are advised to contact the Deutsche Bank office with which they currently deal. Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. No part of this material may be copied or duplicated in any form or by any means, or redistributed, without Deutsche Banks prior written consent. Copyright 2001 Deutsche Banc Alex. Brown Inc., all rights reserved. 2001USA00000

Yardeni Stock Market Cycle

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Yardeni Stock Market Cycle

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Deutsche Banc Alex.

Stock Market Cycles

S&P 500 INDEX* (ratio scale)

S&P 500 INDEX & CRISES (ratio scale)

1850 1550 1250 950 650 2001 WTC Attack 350

1970 Penn Central

1974 Franklin National

1980 Silver Bubble 1962 Cuban Missile Crisis

1987 Stock Market Crash yardeni.com

S&P 500 INDEX (percent above/below 200-day moving average)

S&P 500 INDEX (yearly percent change)

Nov -25 -25

T = S&P 500 major cyclical trough

TRAILING P/E RATIO FOR S&P 500*

FORWARD P/E RATIO FOR S&P 500**

FEDS STOCK VALUATION MODEL* (percent)

-20 -30 -40

FEDERAL FUNDS RATE*

10-YEAR TREASURY BOND YIELD*

300 12/7 250 yardeni.com

S&P 500 EARNINGS (ratio scale)

WEEKLY PROFITS PROXY*

INDUSTRIAL PRODUCTION: MANUFACTURING (ratio scale, 1992=100)

T = S&P 500 major cyclical trough

NAPM PRODUCTION INDEX

T = S&P 500 major cyclical trough

- NAPM Composite #15

NAPM COMPOSITE INDEX

(NAPM PRODUCTION PLUS NAPM PRICE)/2

- Commodity Prices #17

CRB RAW INDUSTRIALS SPOT PRICE INDEX (1967=100, ratio scale)

CRB FUTURES PRICE INDEX (1967=100, ratio scale)*

CRB RAW INDUSTRIALS SPOT PRICE INDEX (yearly percent change)

60 50 40 30 20 10 0 -10 -20 -30 -40

T = S&P 500 major cyclical trough

- Boom-Bust Barometer #19

INITIAL UNEMPLOYMENT CLAIMS (four-week m.a., thousands, s.a)

T = S&P 500 major cyclical trough

BOOM BUST BAROMETER*

- Consumer Sentiment #21

CONSUMER SENTIMENT INDEX: PRESENT*

CONSUMER SENTIMENT INDEX: EXPECTATIONS*

- Consumer Sentiment #23

NEWS HEARD OF RECENT CHANGES IN BUSINESS CONDITIONS*

160 140 120 100 80 60 40 20 0

200 175 150 125 100 75 50 25 0

- Consumer Sentiment #25

BUSINESS CONDITIONS EXPECTED DURING THE NEXT 12 MONTHS*

BUSINESS CONDITIONS EXPECTED FOR THE NEXT 5 YEARS*

140 130 120 110 100 90 80 70 60 50 40

PAYROLL EMPLOYMENT (yearly percent change)

T = S&P 500 major cyclical trough

CIVILIAN UNEMPLOYMENT RATE (percent)

T = S&P 500 major cyclical trough

- Resource Utilization #29

EMPLOYMENT RATE* (solid line, left scale)

CAPACITY UTILIZATION: TOTAL (dash line, right scale)

T = S&P 500 major cyclical trough * 100 minus unemployment rate.

RESOURCE UTILIZATION RATE* (percent)

MONETARY BASE* (yearly percent change)

M3* (yearly percent change)

- Basic Materials #33

PAPER & FOREST PRODUCTS RELATIVE TO S&P 500*

CHEMICALS RELATIVE TO S&P 500*